Question

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,714,000
Cost of goods sold		1,220,596
Gross margin		493,404
Selling and administrative expenses		590,000
Net operating loss	$	(96,596	)

Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,600 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

	B300		T500		Total
Direct materials	$	400,800	$	162,800	$	563,600
Direct labor	$	120,200	$	42,100		162,300
Manufacturing overhead						494,696
Cost of goods sold					$	1,220,596

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $103,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

	Manufacturing Overhead			Activity
Activity Cost Pool (and Activity Measure)				B300	T500	Total
Machining (machine-hours)	$	210,726		90,500	62,200	152,700
Setups (setup hours)		121,770		77	220	297
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	494,696

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek Manufacturing Inc. Income Statement
Sales	$	1,714,000
Cost of goods sold		1,220,596
Gross margin		493,404
Selling and administrative expenses		590,000
Net operating loss	$	(96,596	)

Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,600 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

	B300		T500		Total
Direct materials	$	400,800	$	162,800	$	563,600
Direct labor	$	120,200	$	42,100		162,300
Manufacturing overhead						494,696
Cost of goods sold					$	1,220,596

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $103,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement Sales $ 1,714,000 Cost of goods sold 1,220,596 Gross margin 493,404 Selling and administrative expenses 590,000 Net operating loss $ (96,596 ) Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,600 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: B300 T500 Total Direct materials $ 400,800 $ 162,800 $ 563,600 Direct labor $ 120,200 $ 42,100 162,300 Manufacturing overhead 494,696 Cost of goods sold $ 1,220,596 The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $103,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below: Manufacturing Overhead Activity Activity Cost Pool (and Activity Measure) B300 T500 Total Machining (machine-hours) $ 210,726 90,500 62,200 152,700 Setups (setup hours) 121,770 77 220 297 Product-sustaining (number of products) 101,800 1 1 2 Other (organization-sustaining costs) 60,400 NA NA NA Total manufacturing overhead cost $ 494,696	Manufacturing Overhead			Activity
Activity Cost Pool (and Activity Measure)				B300	T500	Total
Machining (machine-hours)	$	210,726		90,500	62,200	152,700
Setups (setup hours)		121,770		77	220	297
Product-sustaining (number of products)		101,800		1	1	2
Other (organization-sustaining costs)		60,400		NA	NA	NA
Total manufacturing overhead cost	$	494,696

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:



Hi-Tek Manufacturing Inc.
Income Statement
Sales   $   1,714,000  
Cost of goods sold      1,220,596  
Gross margin      493,404  
Selling and administrative expenses      590,000  
Net operating loss   $   (96,596   )


Hi-Tek produced and sold 60,500 units of B300 at a price of $20 per unit and 12,600 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:



   B300   T500   Total
Direct materials   $   400,800   $   162,800   $   563,600
Direct labor   $   120,200   $   42,100      162,300
Manufacturing overhead                  494,696
Cost of goods sold               $   1,220,596


The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $53,000 and $103,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:



   Manufacturing
Overhead   Activity
Activity Cost Pool (and Activity Measure)   B300   T500   Total
Machining (machine-hours)   $   210,726      90,500   62,200   152,700
Setups (setup hours)      121,770      77   220   297
Product-sustaining (number of products)      101,800      1   1   2
Other (organization-sustaining costs)      60,400      NA   NA   NA
Total manufacturing overhead cost   $   494,696           

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Answer 1